By Terri Jo Neff
After months of meetings, crunching numbers, and compromises, the group of legislators and state staff tasked with hammering out Arizona’s $12 billion budget could be ready to roll it out this week.
Rep. Regina Cobb (R-LD5) told AZ Free News that after numerous meetings this session the fine-tuning of the budget package “is down to the last few items.” As a result, legislators could be presented with the package in a few days.
The two most anticipated features involve whether Arizona’s current multi-rate income tax structure will transition to a flat tax rate, and what types of immediate tax cuts will be divvied out of the state’s budget surplus of between $1 billion and $2 billion.
Cobb, who chairs the House Appropriations Committee, said tax relief via tax cuts was on top of the House’s budget wish list heading into budget negotiations, and now that all sides have come to “a general agreement on how much there is to spend” that income tax cuts for all Arizonans are part of the budget.
The other priority was a proposed flat tax which could drop Arizona’s four income tax brackets (which range from 2.59 percent to 8 percent) into one flat tax. According to Cobb, that plan is would get all Arizonans to a 2.5 percent income tax by 2024. A flat income tax has been supported by Gov. Doug Ducey although he had not proposed a rate plan.
Cobb has been involved in the budget or appropriation side of the legislature for five of the seven years she has been in office. Normally the House and Senate hammer out their differences and then bring the plan to the Governor’s Office. This year, however, the budget process differed in that the executive side became involved earlier.
“It was clear our philosophies between the House and the Senate were different, so we made it a three-way negotiation sooner than expected,” Cobb said, adding that the “majority of the negotiating and give-and-take is complete.”
Among those working with Cobb on this year’s budget is House Majority Leader Rep. Ben Toma, as well Sen. David Gowan, the chair of the Senate Appropriations Committee, and Sen. J.D. Mesnard, chair of the Senate’s Commerce Committee. A few issues remain, which is not unusual at this stage.
“The last items are always the most controversial items,” Cobb said.
Ducey introduced a budget for consideration by the legislature when the session started in January. The governor’s budget included discretionary spending and revenue changes necessary to enact a balanced budget, with a forecasted $350 million surplus.
That surplus prediction continued to exponentially grow every few weeks. In mid-April, the Joint Legislative Budget Committee and its Finance Advisory Committee of public and private sector economists pegged the surplus at $1 billion, while some economists put it closer to $1.5 billion or even $2 billion.
The budget discussions are also addressing the impact of Proposition 208, which mandates a 3.5 percent income tax surcharge for thousands of Arizonans, many of whom are small business owners. Those subject to the surcharge are being “walloped” by the tax and need relief, according to Scot Mussi, president of the Arizona Free Enterprise Club.
“We currently have an uncompetitive tax rate structure, which needs to be a priority for the legislature,” Mussi told AZ Free News. “We need a simpler tax code, we need to correct the damage from Prop 208, and we need to push for a $1 billion tax cut to return that money to the taxpayers.”
Another priority, particularly for business owners, is for Arizona’s income tax code to better conform or match up with the federal tax code. This limits the potential for double taxation of income, Mussi explained.
Mussi also noted none of the tax cuts or additional spending due to the surplus will impact Arizona’s rainy day fund, which was established in 1990 as a reserve of funds the state could turn to during economic downturns.
Once the budget bills pass the House and the Senate, Ducey will have the option to sign them, veto them, or let them take effect without his signature. He also has authority to do a line‐item veto of appropriations, although any veto can be overridden by a two-thirds vote in each chamber before adjournment.
But how long it will take for the budget to get approved is not very clear. Traditionally, the legislature will sine die after the budget is approved. Sine die marks the adjournment and end of the session without setting a date for reconvening. It also terminates any unfinished legislative business.
However, Sen. Kelly Townsend has suggested there should be no sine die in case the Senate’s election audit of Maricopa County requires some type of legislative action. She has also been critical of the fact several of her 18 election reform bills never made it out of a Senate committee this year.
It is possible Rep. John Kavanagh, as chair of the House Government & Elections Committee, will introduce strike-everything amendments to others bills in an effort to force the Senate to support Townsend’s legislation, thus potentially ensuring her vote on the budget.
None of the budget surplus being considered by the legislature involves COVID-19 funds, as Arizona is one of a handful of states in which the executive branch controls federal funds issued to the state. That means Ducey has control of his own multi-billion purse derived from federal monies.
Making matters even trickier is that approving the budget will require the support of all 16 Republican senators and 31 Republican representatives unless a Democrat or two cross the aisle. Such uncertainty means it is unclear how much time will be needed by the leadership in both chambers to be ready for a vote.
Another shadow hanging over the budget negotiations is whether Arizona will be punished by the U.S. Treasury Department if it approves tax cuts which the Biden Administration later considers were “directly or indirectly” offset by federal COVID-19 funds.
Attorney General Mark Brnovich has filed for a court order declaring part of the recent COVID-19 relief package unenforceable. That provision prohibits states from using COVID-19 federal monies to essentially underwrite tax cuts, but the language needs to be clarified, according to nearly two dozen attorneys general.
“The fact that those politically allied to enact the Act cannot even agree with each other as to what the Tax Mandate means provides powerful evidence that it is subject to multiple potential interpretations,” Brnovich argues in a lawsuit filed in March in U.S. District Court. “Indeed, the language of the Tax Mandate is patently ambiguous, and even borderline incoherent.”FY 2022 Summary Book